Yesterday, the UK electorate voted by a small majority to leave the European Union ("EU"). This result defied the predictions of most pollsters and the financial markets, which had anticipated a "stay" vote. When the markets have calmed down, and the political dust has settled, firms should start thinking about the vote's long-term implications for their businesses. In the next couple of months, we will engage with clients to help with that process from a regulatory perspective.
For a longer-term perspective, please see the paper published by ACA Europe in April: Looking across the Brexit void: what will happen to your business if the UK votes to leave the EU. In our view, the bulk of this analysis and its conclusions still hold.
In the short term, we would like to focus on a few observations.
What happens now?
The UK’s political leaders have vowed to respect the referendum result and therefore a fundamental change in the relationship between the UK and the EU is in store. This points to a notification to the European Council, under Article 50 of the Lisbon Treaty, which will trigger a negotiation process for the terms of withdrawal that can last up to two years (or longer if agreed upon by both sides).
It should be noted, however, that UK Prime Minister David Cameron, when announcing his resignation this morning, indicated that he will leave the timing of the notification to his successor (who will not be announced before fall 2016). Therefore, it is possible that the full terms of the UK’s exit will not be clear before Q4 2018.
Will the FCA Handbook immediately change?
Given the uncertainties around the negotiations, we believe this is extremely unlikely. Indeed, the FCA have already issued a statement this morning:
Much financial regulation currently applicable in the UK derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament.
What happens to imminent new EU rules such as MiFID II and central clearing under EMIR?
We expect upcoming regulations, such as central clearing under EMIR (October 2016) and MiFID II (January 2018) to proceed according to their existing timetables, unless otherwise directed by the incoming administration. This is again confirmed by the FCA’s statement:
Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.
What is the future of existing EU regulations for UK investment managers?
The sector most directly affected is UCITS, since these (by definition) have to be domiciled inside the EU Whatever settlement is reached with the EU, full access to European markets for UK UCITS seems improbable and they, in essence, cease to be UCITS from the date of the UK’s withdrawal. Managers of such schemes will therefore most likely have to start planning a change of domicile, probably to one of the UCITS-friendly hubs such as Ireland, Luxembourg, and Malta.
The future of other financial regulations in the UK, such as AIFMD, is less clear. This is where the broad shape of the UK’s exit negotiations starts to matter: in a number of industries – financial services being the leading example – the need for regulation that is equivalent to EU legislation in order to retain passporting access is paramount. This portends a pragmatic settlement. Harder to reconcile with a moderate settlement (e.g., an EEA-type arrangement) will be the EU’s insistence on the freedom of movement of workers principle, given the focus on migration within the UK referendum debate.
In the case of AIFMD, we will likely see retention of the organizational and conduct of business aspects of the Directive, perhaps minus some of the more onerous Annex IV reporting requirements. The future of the AIFMD passport for non-EU-domiciled funds may also be in doubt. The existing process for determining the equivalence of third-country regimes had already run aground on the shoals of European bureaucracy and, shorn of UK/FCA political will, may slow even further, leaving the National Private Placement Regime as a semi-permanent feature.
What about non-EU-based managers?
Both AIFMD and MiFID II provide for the possibility of passporting access within the EU for third-country firms. As noted above, however, the FCA and UK government were a major force in driving through these proposals and, in their absence, EU legislators are unlikely to be so welcoming. That said, marketing under AIFMD Article 42 remains a viable proposition for non-EU managers in a number of EU jurisdictions and we see no reason why that should not continue.
What should our clients do now?
As noted above, the status quo remains in place for now and the exact nature of the UK’s relationship with the EU generally, and the financial services regulatory regime specifically, will not be clear for some time yet. For now, it is watch and wait – we will keep you up to date as matters progress.
Please contact your ACA consultant with any questions.